June 2010 | Outsourcing Blog | BPO Industry Updates and Articles

Rules to make offshoring a success

The process of offshoring a business takes a lot of careful planning and can sometimes take a year or more to move into the implementation phase. Global business process outsourcing company WNS lists 8 simple rules in order to make offshoring a success:

1.) Ensure that BPO is the CEO priority - Sponsorship of an initiative that is as critical as BPO must come from the very top. If there is no other option to keep the business afloat, the CEO must be the one to deliver such a message in order for it to be taken as seriously as it should.

2.) Approach outsourcing with an open mind - There are a lot of myths and generalizations that are made regarding the outsourcing industry. Businesses should be open-minded to the possibilities that outsourcing holds and that it extends way beyond just call center work.

3.) Keep it simple - Do not make the transition of sending work offshore a time for making radical changes to your business processes. Offshoring should instead be simply about cost reduction without compromising quality.

4.) Move fast - BPO will not achieve the results desired if it is not seen by the company as critical. Companies can encourage timely results by implementing aggressive timelines across the board.

5.) Empower an internal outsourcing czar, and put top talent on the case - The czar here is referred to someone at the center of the organization who is fully committed and accountable to the success of the transition. WNS states that “survival programs are always led from the top and the center”.

6.) Develop a realistic deployment plan - As crude as it sounds, sometimes being slow and steady wins the race. The offshoring deal must be well-measured and meet objectives without being disruptive to the business. Companies need to be wary of buying into unrealistic transitions in the midst of hurrying to cut costs.

7.) Insist on alignment - It is critical to partner with an offshoring provider that is willing to align its strategies with the client rather than impose its way of working. This means understanding the provider’s values, customizing deliverables to meet its needs, and understanding the scope of work.

8.) Debit budgets in advance - When offshoring and outsourcing companies implement a BPO budget into the savings in advance, it leaves managers with no choice but to commit themselves to the cause, or find a new way to cut costs fast.

An Economist's Take on 7 Tips in Outsourcing

Dr. Oliver Williamson, Professor Emeritus of business, economics, and law at the University of California-Berkeley, outlines “7 Tips for Peace, Profit and Productivity”. Although it does not look dissimilar to a lot of lists that we have encountered regarding the outsourcing and offshoring industry in the past, Dr. Williamson did win the Nobel Prize in Economics in 2009. Here is the gist on the seven tips:

1.) Build cooperation into the contract -Williamson believes that the partnership can be much more rewarding if both customer and supplier implement measures to preserve cooperation throughout the deal. Williamson writes that "efficiency gains from trade go back to when our ancestors traded nuts for berries on the edge of the forest, [in] which exchanges were both transparent and simple."

2.) Factor in hidden transaction costs - This is due to the well-known fact that many offshoring projects never cost the same as initially written in the contract. It is therefore essential to figure out the long-term cost beforehand, as difficult as that may be.

3.) Use the contract as a framework, not a weapon - Outsourcing customers who may have been victimized have a tendency to create overly detailed contracts to prevent any possibility of contingency, which is a mistake.

4.) Make end-of-life arrangements early - Many forget that outsourcing and offshoring deals don’t last forever. The proactive approach would be to plan for defection early on and figure out how to mitigate its effects. After all, changes in a business relationship are most assuredly subject to change as the market changes. Contracts, therefore, need an exit management plan that is well-thought out and fair for both sides.

6.) Play nice (but not too nice) - You can gain the upper hand on your supplier, or let the supplier gain the upper hand on you. Either way, you are in for what Williamson refers to as “one-sided muscular contracting” which will only yield short-term gains.

7.) Always leave money on the table - Many are quick to dismiss this strategy as foolish. However, working towards getting the cheapest price can, according to Williamson, cost both parties in the long-run. Leaving money on the table can instead be a “signal of constructive intent to work cooperatively”, which in turn minimizes “concerns over relentlessly calculative strategic behavior”.

CIOs are looking at outsourcing and offshoring

A new survey has revealed that today’s CIOs are looking at outsourcing and offshoring to pack a bigger punch with money spent down to the last penny. However, the survey also indicates they also want to focus on using IT to transform the business through innovation and productivity.

The report, entitled “From cost to value: 2010 Global Survey on the CIO Agenda”, was published by advisory firm KMPG as part of the 2010 World Congress on IT in the Netherlands. The survey was based on KPMG’s technology data and was distributed to 4500 CIOs around the world.

As well as probing into possible offshoring approaches of high-profile CIOs, the survey categorized eight priorities for them to rate: IT value, the CIO profile, the value of people, process improvement, risk and compliance, sourcing, collaboration, and optimism.

The survey announced that “organizations wishing to create sustainable value need to get a grip on the way all information is produced, collected, and used, and they need to use IT to respond rapidly to the changing market and society.”

The survey also deduced that: “To a large extent, the daily focus of any CIO depends on the sector in which he or she operates. CIOs in the financial sector are comparatively more involved with daily operations, while CIOs in the manufacturing sector are looking more at ways to innovate and transform with the help of IT.”

The survey showed that 56% of respondents said cost optimization should always be a part of the organization’s IT strategy as it is a competitive weapon.

Given the strong growth of online services in the offshoring landscape, CIOs expect use of collaboration tooling to increase significantly over the next five years. Cloud computing is receiving a marginal 72% of CIOs, claiming this practice was a good way of outsourcing IT functionality.

The concepts raised in the survey could prove substantial in the global offshoring industry as Ian Hancock, KPMG’s national IT advisory in Australia, claims. After all, about 16 CIOs who took the survey represent the top 200 companies in the world.

According to Hancock, staffing, sourcing, compliance, and cloud computing are the top priorities of CIOs locally.

“Retaining people is a challenge for everyone and my view is to retain good people you need to be able to give them ways to develop new capabilities,” Hancock stated. “The message in the report is about innovation and the challenge for CIOs is to enable a career path.”

“The real challenge of previous outsourcing was predicated on cost, but CIOs lost control of the environment they need to create value in. How do I continue to create value in environment that I’ve outsourced to a third party?”

Cost Savings through Offshore Outsourcing

Following the demand for more effective use of resources, increased talk is being seen in the UK about the efficiencies and cost savings that can be achieved through offshoring and outsourcing.

While there was already a lot of tension over jobs being lost among employees in the public sector in the UK, media sources have published reports that millions of private sector jobs are also at risk to offshoring. However, such predictions are likely formed from a lack of substantiation and from inflated figures. The emergency budget’s direct impact on the UK’s unemployment rate remains to be seen.

Outsourcing has been in practice in the country’s government for about 20 years. Although it is effective in many areas with the legal process offshoring industry experiencing increased growth, it has been troubled in terms of managing offshoring relationships.

“The bad press that surrounds the cost-effectiveness of some past public outsourcing projects notwithstanding, I would expect a well thought through outsourcing contract to provide effective and cost-effective delivery of services,” said Danny Jones, partner in charge of UK public sector at advisory firm TPI.

This may be due to the increase in outsourcing contracts that have been given, causing a host of new jobs in the outsourcing community. However, according to Jones, the outsourcing industry could also be negatively impacted: “Suppliers are already feeling the squeeze particularly when it comes to negotiating contract extensions; and they expect this to continue.”

The recent report by KPMG confirms this as it discovered that outsourcing is not as high on the CIO agenda as some may have anticipated.

Although this may look bleak to proponents of offshoring and outsourcing, industry players will maintain that there are still more opportunities than there are drawbacks to be had regarding the announcement. Although the government is in need of cost-saving solutions, it also needs solutions that produce results fast. This is something that offshoring industry is proven capable of doing.

It now comes down to just how fast outsourcing will deliver such solutions while still paying regard to semantics. After all, it will typically take 18 months and sometimes two years for an outsourcing project to being producing significant earnings from the time of signing. This could prove to be a significant issue unless the government changes its outsourcing model to resemble that of the private sector.

“Typically, the government has awarded large contracts to a single supplier, but we will see a shift to a model where government breaks large projects into manageable blocks which are then awarded to suppliers according to expertise/service required. This will increase the effectiveness of delivery if it is well managed,” says Jones.

Global Outsourcing Market

A recent report by global consulting and research firm, Everest, proves an ongoing theory that the growth of the global sourcing market is indicative of a recovering global economy. The IT outsourcing and offshoring industry has experienced particularly high growth – climbing 43 percent from the last quarter of 2009 to the first quarter of this year. In addition to that, transaction volumes are valued at US $3.9 billion, maintaining its stride for its third straight quarter.

According to Everest's quarterly report on the outsourcing and offshoring industry, activity in North America for Q1 of 2010 is up 18% while the ACV increased 36% in the fourth quarter of last year. Also reported was a 6% climb in transaction volumes in Q1 2010 from Q4 2009. The quarter featured four more mega deals of contract values over US $1 billion compared to last quarter.

With 35 new captive centers officially announced in Q1, the captive market remained on a steady growth path - a quarter of the 35 located in Asia and the remaining 11 in India. Outsourcing and offshoring suppliers in India revealed plans of aggressive hiring in order to meet the rise in demand, with leading IT providers Infosys, Cognizant, and TCS already annoucing a 50-60 thousand increase in staff throughout this year. Similar plans were announced by global-centric providers Capgemini, IBM, and CSC. The trend has begun affecting attrition rates as well as wage inflation in India, the leading offshore services location.

Compared to the fourth quarter of 2009, Business Process Outsourcing (BPO) accounted for 32% of deals signed with transaction volume increases of as much as 30%. Transaction activity in Europe experienced a marginal volume largely owed to a 33% growth in transaction volumes in the United Kingdom.

The Philippines joins Brazil, China, and India as locations that saw a notable increase in offshore activity, with 44 new delivery centers having been created. A significant amount of activity was recorded in Asia in Q1 2010 with its Tier 1 cities reporting more activity than its Tier 2 cities. Supplier transaction activity volumes remained steady overall.

“Outsourcing market activity during the last quarter was largely led by renewals and restructuring of existing contracts”, stated Everest Group Principal and Country Head India, Gaurav Gupta. Amneet Singh, Vice-President-Global Sourcing, Everest Group commented, “It is encouraging to see demand side momentum translate into 44 new supplier delivery centers in Q1 with activity continuing to be concentrated in Asia.”

Whether it's a large or a small business, outsourcing web design work has been a long-standing practice that has proven to hold many benefits – particularly among Internet-based enterprises. Outsourcing web design work, in general, is particularly effective for smaller business owners who now realize the importance of an online identity for success.

Outsourcing web design

An online corporate identity needs to reflect the core values of the organization as well as project standards of excellence and professionalism. Typically, these are the characteristics of websites that are produced by experts in the field. Users often judge a website based on the quality of its design and a good balance between eye-candy and effectiveness. By effectiveness, this means navigability and its ability to draw traffic and achieve its purpose. Outsourcing web design work offshore requires choosing a service provider that is experienced in delivering such results.

The field of website creation and design is a challenging one that is constantly changing and developing new technologies. Creating your own website requires that you know the skills necessary to create them. Often, hiring your own staff will prove not only costly but difficult in terms of finding experienced and skilled professionals who are up-to-date on the latest web design trends. Outsourcing website creation to professional web design providers will allow you to gain access to a high degree of expertise at much lower costs. This would have been much more costly and time-consuming to achieve in-house.

Outsourcing your website needs means acquiring the assistance of a web design organization that has the resources and expertise necessary to deliver outstanding results. It is for this main reason that outsourcing web design work has become common among small companies as well as start-ups that otherwise would not have been able to create such a powerful online presence domestically. Many small firms and start-ups that create corporate websites feel the need to communicate to their customers that they are not as small as they seem – even though in many cases, there are only a handful of employees involved in the enterprise. A professional and cutting-edge website will serve this purpose perfectly.

Statistics show that web-based commerce moves seven times faster than the rest of the business world. As such, it is always something that one should consider investing in as the returns are well worth it. Outsourcing to an offshore service provider that will give you maximum returns on investment has proven for many businesses as the ideal move to capitalize on this trend.

Flexible Outsourcing Contracts

There are many outsourcing and offshoring buyers that will lock a deal with a service provider and fail to account for the changes that are bound to occur throughout the partnership. Throughout its development, the outsourcing industry has gone through a variety of different phases. The first phase was typified by long-term IT outsourcing. As the industry aged, however, these “mega deals” are now replaced by best-of-breed, multi-sourcing, and offshoring. Throughout its life span, however, the factors that can create changes in an outsourcing partnership remain the same: economic, social, technological, environmental, and legal.

Whereas the scope of contracts once reached as much as 10 years, business decision cycles nowadays are much shorter. There are budget cycles subject to mid-year revisions, and strategic plans are revised for quarterly reporting. Tactical plans can change monthly, weekly, and even daily. As such, it is critical, now more than ever, that an outsourcing/offshoring contract is flexible enough to adhere to such changes.

So how do we identify a non-flexible contract? The main reason for the inflexibility of an outsourcing contract today is the discomfort that surrounds an ambiguous business partnership on both sides. The customer wants to receive a specified outcome, while the supplier wants to set in stone exactly what is to be delivered and it will generate profit. It is therefore not enough that a contract be flexible, but it must also be able to guarantee that the partnership is mutually beneficial.

So how is a flexible outsourcing contract designed? There are many things that service providers can do to incorporate flexibilty in their contracts. If, for instance, a large contract is involved, it can be split into multiple elements, allowing each to be addressed and modified separately. With the proliferation of global-centric offshoring providers, it is also possible to use more than one supplier - creating an opportunity to benchmark. You could also shorten contract terms, or provide break clauses, enabling services to be retendered more frequently.

Among the key elements of successful outsourcing and offshoring contracts are effective governance, gain-sharing, market testing and benchmarking, and break-clauses. Another area that may be overlooked at times is the contract's ability to factor in publicity. There are many publicly held views that hold outsourcing and offshoring in a cynical light. This can adversely harm a buyer's reputation with its customers. At the same time, the service provider's ability to prove itself capable of delivering maximum return on investment to other prospective customers requires such disclosure of the buyer-supplier relationship.